It's Not That Big a Deal

Highlights From Gallup’s No Recovery: An Analysis of Long-Term US Productivity Decline

Last week, Gallup (in cooperation with the US Council of Competitiveness) released an incredibly detailed thirty-year study on the decline of American productivity. While the report is certainly worth reading (you can download the full version here), it’s about 120 pages long–who has the time or patience?

Luckily for you, and for reasons to be touched on herein, I do. It seems unnecessary to say, but nearly everything that follows is extracted from Gallup’s report. Without further ado, here’s a quick summary of No Recovery: An Analysis of Long-Term US Productivity Decline.

First, a note: Quality-to-cost ratio

Gallup helpfully identifies the engine of economic growth as an increase in the ratio of quality to cost. In other words, growth is evidenced by increased efficiency: falling real costs or increasing quality.

To the economically inclined, this may seem obvious. But it’s inconsistent with lots of contemporary policy and thus a worthwhile observation. Indeed, Gallup puts the cost of increased federal regulation at $250 billion annually since 1981.

GDP Growth Slowdown

It’s no secret that America’s recovery from the Great Recession has been anemic. Between 2007 and 2015, GDP growth was about 1% annually. If that rate continues, Gallup estimates that by 2050 GDP per capita (currently $56,000) will only reach $79,000 by 2050. For some perspective on how much the rate of growth matters, Gallup offers that a growth rate of 1.7% over the same period would result in a GDP per capita of $101,000.

Not everyone is a fan of studying GDP; its omission of unpaid labor caused feminist economist Marilyn Waring to claim it was invented by men to “keep women in their place.” However, Gallup argues, it’s rather reliable as a proxy for human well-being as it correlates with various quality of life metrics.

Similarly, GDP growth is important in that it indicates the degree to which an economy is becoming more efficient and effective at creating value. Lack of growth indicates an economy that is not becoming more efficient, either through failure to increase the quality of goods and services available or a expanding costs without corresponding increases in quality.

Gallup attributes the slowdown in growth to dropping quality-to-cost ratios in three key sectors of the American economy–healthcare, housing, and education–which account for over 50% of inflation over the past 30 years. Without the inflation incurred in these sectors, real GDP growth would have been 3.9% between 1980 and 2015.

Healthcare

The United States devotes “more resources to healthcare than any other country” but receives worse outcomes than most OECD nations, the report details. By Gallup’s measurements, health outcomes have stagnated for Americans, particularly those of working age, since 1980.

Since then, Gallup estimates that 24% of inflation has been caused by increasing healthcare costs. The cost of healthcare has increased 4.8 times since 1980, while the cost of health insurance multiplied by 8.7.

For all our increased spending, Americans are seeing practically no returns. Maternal mortality increased from 12 to 28 deaths per 100,000 births (1990-2014). The age-adjusted rate of obesity, which causes and additional $170 billion in health spending, increased from 15% to 35% between 1976 and 2011. Age-adjusted rates of diabetes increased from 3.5% to 6.6% from 1980 to 2014.

Not only are Americans getting sicker, but their illnesses seem to be getting more severe. Illness or disability is now the leading reason Americans are out of the labor force. Those reporting a disability were more likely to have been out of the labor force within the past two years than in the past (78% 1988-1990 compared to 84.5% 2014-2015). Those out of the labor force are more often reporting pain than in the past and are more likely to be taking opioids.

Poor health outcomes and rising costs are having direct and indirect effects on the labor market.

The rising cost of healthcare, which is increasingly obtained through employers, has created a drag on employment, Gallup argues. Healthcare costs are acting as barriers to entry, preventing companies from opening, hiring, or expanding and holding down wages. Healthcare now composes 8.1% of employee compensation, up from 4.5% in 1980.

The study identifies some of the primary causes of healthcare inflation over the past four decades.

First, idiosyncratic private practices consume a lot of money and time. Americans spend 4.6 times as much on healthcare administration costs as the OECD average.

Federal and state regulations play a huge role in cost inflation as well. In many cases, state laws prohibit nurses from carrying out the functions of general physicians, even though evidence suggests that patients treated by nurses have equal or better outcomes than patients seen by general physicians. According to Gallup, allowing nurses full practice would save hundreds of billions of dollars. Intense regulations depress nursing hours and inflate physicians’ salaries to levels far beyond what is found in other OECD countries.

State-sanctioned hospital monopolies are also listed as a cause of healthcare inflation. According to the study, lack of competition in healthcare wastes $55 billion annually.

The study suggested a lack of business training on part of physicians as a potential cause for weak productivity gains in healthcare. Perversely, Gallup reports that 68% of healthcare innovations cost more than previous methods of treatment–even accounting for health outcomes. (As an aside, I would speculate that a fee-for-service model does little in the way of incentivizing innovative and cost-saving practices).

What not to blame: Access to care, illegal drug abuse, changing demographics, and diet and exercise patterns do not significantly account for the decline in healthcare productivity or outcomes, according to the report. However, prescription opioid use is indicated as a factor.

Housing

Gallup finds that housing has become 3.5 times more expensive since 1980. These costs have affected renters and owners, though to different degrees. In 2014, rent made up 28% of the average family’s income, compared with 19% in 1980. Home-owning costs have also increased over the same period: up to 16% of income from 12%.

Despite the increase in costs, quality has lagged. Americans are living in older homes that are farther from work and smaller in size than they were in 1980. Home ownership is at its lowest rate since 1967.

Tables: obviating a thousand words at a time. Taken from No Recovery: An Analysis of Long-Term US Productivity Decline

The causes of housing inflation are mostly attributable to local land-use regulations.

In relatively competitive markets, supply will normally increase to meet demand, causing prices to stabilize. What is frequently happening in the United States is that as housing and rent prices increase, developers find themselves “regulated out of the market.” This leads to a strange correlation between high price and low supply growth in counties.

The report found that from 2000 to 2010 housing density actually fell in major metropolitan areas. Meanwhile, prices have soared; the median home value in Palo Alto, where only 27% of land is zoned for residential use, is $1 million. The problem is compounded by regulatory distaste for multi-family developments. This kind of market restriction is common, according to Gallup.

The main takeaway from this is that local political forces are chiefly responsible for housing inflation through the use of zoning policies. Such policy is a form of rent seeking that increases housing values for some at the expense of those who would hypothetically live in aggressively zoned areas without actually improving housing quality.

Education

Per pupil public spending has increased from $6,200 in 1980 to $10,800 in 2013, adjusting for inflation. Yet, like healthcare and housing, increases of per unit costs in education have greatly outpaced productivity gains.

The statistics are damning: Literacy rates among 17-year-old Americans peaked in 1971. Standardized testing reveals that math scores peaked in 1986. Test scores show a lack of improvement in math, science, and reading, in which respectively 25%, 22%, and 37% of American students are proficient.

This kind of stagnation isn’t typical among other nations; the United States showed much smaller levels of inter-generational improvement than other OECD nations. Up until about 1975, Americans were scoring significantly higher in math and literacy than Americans born before them. Since 1975, scores have plateaued, even adjusting for race and foreign-born status of students. As the study states, this implicates the entire US school system.

Higher education seems no more productive. While the cost of higher education has increased by a factor of 11 since 1980, literacy and math scores for bachelors degree holders peaked among those born in the the 1970s. United States college graduates rank 23rd among OECD countries in numeracy.

Dipping quality-to-cost ratio in education drags down employment, incomes, and GDP. Companies in America are forced to delay projects or turn to foreign workers to meet growing demand for high-skill employment. This is particularly pronounced in the sciences; 48% of scientists with a graduate degree are foreign-born. More indirectly, low educational attainment is shown to correlate with low health outcomes.

A primary cause of our inefficient education system is that teaching has become an unattractive profession.

Ironically, a lot of this has to do with the standardized tests that let us know how poorly our education system is doing. Gallup cites surveys indicating 83% of teachers believe students spend too much time on testing and New York Times reports that many schools spend an average of 60 to 80 days out of the school year preparing for tests. The study suggests there may be an unnecessary amount of testing caused by special interests; between 2009 and 2014, four standardized testing companies spent $20 million lobbying policymakers.

Teachers also cite a lack of autonomy and incentive. Salaries start and stay low, with no accountability system to reward effective teachers. Similarly, teachers’ unions have tied pay to seniority, rather than performance.

Another explanation provided by the study: teachers in the United States are less likely to have been good students than teachers in countries that do better on testing.

Where higher education is concerned, federal subsidies are more often flowing to under-performing schools where students are less likely to graduate and more likely to become delinquent borrowers. This lack of discrimination ends up increasing national student debt and funneling resources to inefficient educators.

Unsurprisingly, the explosion of non-teaching staff at colleges is also implicated by the study. Between 1988 and 2012, the ratio of faculty to students grew from 23:100 to 31:100 without any measurable increase in quality.

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United States policy is in serious need of reform, argues the report. The writers state that improving market functionality and competitiveness should take precedence in forthcoming economic debates. More specific policy recommendations from Gallup are on the way.

In the meantime, anyone interested should really take a look at the full publication. It’s important and absolutely first class, plus it contains lots of awesome graphs that I didn’t include here.